College of Business Administration

Article Reprints:

Lester B. Lave & H. Scott Matthews

It's Easier to Say Green Than Be Green High Technology Review, November/December 1996: 68-9

Not very well, it seems. To probe the real-world limits of corporate altruism, we surveyed 54 large U.S. companies--all of which have expressed environmental concerns through actions such as publishing an environmental report. The survey described the following hypothetical situation: Suppose that a material in one of the company's products were found to in some way harm the environment. Further suppose that a nontoxic substitute material were available. The substitute yields exactly the same product quality--but costs more. How much more, we asked, would the company be willing to pay for this environmentally nontoxic material? Given the nonrandom nature of the survey, we urge caution in generalizing the results. Still, the answers offer insights into corporate priorities for the 25 companies responding.

We posed this question for several scenarios, in which the toxic material accounted for varying percentages of the product cost, and in which the substitute material carried a varying cost premium. When the toxic material constituted 1 percent of product cost, almost all respondents were willing to switch to a safer material that was only 1 percent more expensive. In other words, almost all companies were willing to raise product costs 0.01 percent (for example, $2 on a $20,000 car).

We were surprised to find how quickly this willingness to pay more to protect the environment fell off. Only two-thirds of the respondents answered that they would be willing to make a substitution that raised product costs 0.1 percent. One-third of firms said they were willing to raise costs 1 percent. Two companies of the 25 said they were willing to raise costs 5 percent. No company was willing to raise costs any further.

Admittedly, the hypothetical situation is vague; it doesn't spell out exactly how much damage to the environment might be averted by switching materials. The conclusion nevertheless seems clear: despite their PR, companies will take measures to reduce pollution only as long as they do not involve much effort or cost.

Remember--the companies surveyed all had publicly professed to be environmentally aware. If they are unwilling to increase costs more than a trivial amount to prevent pollution, what can we expect from firms that don't trumpet their ecological concern?

We are confident more businesses would engage in environmentally friendly behavior if they perceived that such behavior would lead to favorable publicity with the potential of higher market share. Public opinion surveys, our discussions with company executives, and the massive business participation in efforts such as the President's Council for Sustainable Development indicate society's desire for pollution prevention.

In Northern Europe, in particular, consumer gravitate to products that they perceive as causing less pollution. Opel, for example, offered automobiles with U.S. tailpipe emissions-control at a price premium at a time when Germany did not require stringent controls. Opel's market share increased, apparently because German consumer desired a greener car despite the higher price. Manager son this side of the Atlantic believe that few U.S. consumers would respond similarly. In highly competitive industries, where profit margins are low and small differences in price are sufficient to take over the market, it would be suicidal for a firm to raise product costs unless consumers perceived the green product to be superior.

Companies respond to what they perceive consumers want. Some of our respondents, however, expressed frustration that they were unable to tell potential customers about the improvements they had made in their products. The Federal Trade Commission, Environmental Protection Agency, and some state regulators have concocted sufficiently narrow definitions of such environmentally related terms as "recycle" and "recyclable" that companies shy away from advertising the positive steps they have taken. IBM, for example, made a computer that was highly energy-efficient and designed to be easily recycled, but the company lawyers thought that advertising these advantages would violate existing rules.

What Makes a Firm Green?

In many cases, the measures that prevent pollution also save companies money. Pollution is, after all, waste, which signifies inefficient use of resources. Wall Street should reward firms for steps that increase profit, but a firm should have to go beyond steps that raise its profit to earn environmental recognition. We propose five attributes that reflect a company's commitment to invest in pollution prevention and green products.

*Green consumers. A green firm invests in understanding the green demands of its customers and the market niches for green products.
*Technology investment. A green firm invests in technology to prevent and clean up the pollution that its facilities generate.
*Materials choice. A green firm is willing to increase product costs a small amount--perhaps 5 percent--to prevent toxic discharges.
*Redesign. A green firm is willing to invest a portion of its product revenues--again, 5 percent seems reasonable--toward a redesign that lowers pollution.
*Sustainability. A green firm attempts to lower its use of resources to leave more for future generations.

In an increasingly competitive marketplace, firms must be able to benefit from their green actions. At a minimum, businesses must be able to tell their customers, salespeople, regulators, and other groups about their green actions. Unfortunately, some firms will claim they are green without taking the actions. Thus some mechanism must be put in place to certify the claims. One possibility is to create an organization to establish criteria and then to certify that products meet these criteria. The quickest way to begin these certifications would be for a government agency to consult the affected companies, then promulgate agreed-upon criteria, and delegate product testing to a non-governmental organization.

One good model is the Energy Star ratings, created by EPA, for products' energy efficiency. A similar program could regulate claims that a product is recyclable or is made from recycled material, that it is free of toxic materials, and that the manufacturing process produced little or no hazardous waste.

Our proposed attributes are realistic. Some companies define themselves as being on the leading edge of technology, and so commit themselves to be on top of new technology and to performing R&D to develop a stream of state of the art products. Others define themselves as a source of the highest-quality products, where quality is in the eyes of the consumer. Companies of both types make investments that have uncertain payoffs, but generally are successful.

By analogy, we define a green company as one that is committed to informing its engineers about green technologies and tools; to R&D aimed at lowering the discharges of toxic substances; to experimenting with the greeness of its products to elicit consumer response; to lowering the use of nonrenewable resources; and to using renewable resources at sustainable levels. We challenge companies to back up their expression of environmental concern by making these commitments.

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